Oil update

In my September 26th update, I proposed that we were about to begin a minute degree wave ((v)) decline.   That was incorrect.  After yesterday's strong continuation rally, I had to go back and look at my counts.  I believe the 9/26 low was actually the completed minute wave ((iii)) down.  What threw me off was not seeing the final five wave move down, but I was on a 2D chart, and when I switched to 1D, it became clear.  The other issue on the USO chart was (v) of ((iii)) did not make a new low, as it did on the future.

We had a strong five wave move up that began on Monday (see the lower chart).  I think we are heading up for at minimum, a minuette degree (a)-(b)-(c)  zigzag correction for minute wave ((iv)), so we still need the rest of (b) down and (c) up.
That should terminate in the area of minuette wave (iv) or 36 on the USO, 91 on the /CL, give or take.
The point is, this is very manageable, and there was no reason to panic.  Having said that, I will likely flatten out when today's downside correction is over, which should wipe out most if not all of yesterday's gains.
I'll look for another entry higher.

Update 2:33pm
I'm flat - exited for a decent profit

September 26 Update

USO

Looking at the wave structure, I can't find a way to easily count a completed five waves down at minute degree and above.  In the top chart below, I'm showing a 2D chart for an intermediate degree picture.

Sometimes it's not entirely clear whether a particular wave is extending.   My assumptions are based on three guidelines of Elliott Waves.  First, that second waves often deeply retrace the first wave.  Second, that fourth waves are often sideways and drawn out affairs.  And finally, that momentum is often the highest in the third wave.  
 
Let's just step through the top chart where we are carving out an intermediate degree wave down.  I've decided to look at each thrust down in isolation, and the size and shape of the ensuing retracement.

The first wave down:
I have labeled the first wave minor degree wave 1.  The retracement of the first wave down that began on 5/2 was a shallow 38.2%.  Shallow second waves are not very common, but in a strong trend, not unexpected either. 
The second wave down:
The next wave down showed clear five wave subdivisions, but ended up being shorter than the first wave.  For this to be a valid third wave, it would have to be longer than the next wave down (the third wave is never the shortest).  Well that's off the table, as the next wave is the longest wave down yet.  In addition, the retracement of the proposed third wave is greater than 61.8%, which would be very unusual for a third wave.  Finally, it overlaps the first wave, which is a rule break.  Based on deep retracement, and the size relative to the first wave down, I've decided to label this an extended first wave of minute degree, wave ((i)).
The third wave down: 
The next wave down carried the greatest momentum we've seen so far, which fits in well with a third wave.   Additionally, it was followed by a sideways, drawn out correction typical of a fourth wave.  I've labeled this minute degree wave ((iii)).

Looking at the 4H chart to zoom in on the final thrust down, we appear to be carving out a fourth wave of subminuette degree.   The momentum lows line up well with the third waves, and the proposed subminuette degree wave iv should terminate within the area of micro degree ((4)).

In summary, we need to trade lower short term to complete a fifth wave of minute degree, which will still only be a third wave of minor degree by my estimate.  I expect that the upside work accomplished today will only last the overnight session, or the early part of the trading session tomorrow before the downtrend resumes. 

The Ichimoku trending indicator seems to agree.  The signal line is well below the base line on both time frames, and price is nowhere near testing cloud resistance.  Price is trying very hard to get up to the base line in the lower chart.  I have a feeling if it can even get there, it will bounce off it hard.  This is a very bearish picture.

I remain short, and in fact decided to sell the short leg of my verticals today.   We'll see how this strategy plays out this time around.

SPY

Looking at the equity markets, we are still carving out a minor wave 3 down by my estimation.  It remains to be seen whether we are actually in the fifth wave down of minute degree, or just continued chop in minute ((iv)).  I feel like just based on time, we need the next wave soon, or wave form becomes a problem.

The Ichimoku charts tell a very interesting story.  You can tell that prior to June, price was well above the cloud support.  On June 3,  the signal line crossed below the base line.  Thanks to TOS On Demand, you can see exactly what the chart looked like at the time.
 The cross happened above the cloud, however, which is a weak signal.  Also, the lagging line was ever so slightly below price, which was also weak bearish signal.
The attitude here should be get defensive if you're bullish, or possibly tighten stops.  If you're bearish, and aggressive, you could try short at the cross, or wait for price to break cloud support.  I think a strong rising cloud like this one should be respected though, and waiting for a retest of resistance makes sense.

Price never quite made through the lower cloud resistance before retesting the highs, breaking back up through the cloud again.   The signal line crossed back up through the base line, but from within the cloud which is not a signal to act upon.  Price will either find comfort back above the cloud, or it will break back through it to the downside.  On 7/29 price plummeted through the cloud support like a warm knife through butter, and the signal line crossed back down through the base line, this time crossing from under cloud resistance.    That's an immediate sell signal, and hopefully from this chart it's obvious why.  Nothing about this chart tells me to get bullish any time soon.   Even will all the volatility we've had, look at how well confined price action is under the base line, let alone cloud resistance.

I thought I would zoom in on that chop, just to show how no system is perfect.  I'm showing the /ES futures, just for example.

If you were trying to religiously follow this to time the next leg down, even a conservative signal cross on 9/13 would have resulted in a stop loss.  The next cross happened above the cloud bringing us current, where price is trying to test cloud resistance yet again.  The big lesson here is to pay attention to the higher time frame.  I think the wave principle also helps keep you from stepping in front of a freight train if you have an idea of where you might be in the wave structure.


Sentiment

The last thing I wanted to discuss is trader sentiment, which also helps form a contrary opinion at times.  The chart below from stockcharts.com, is a chart of the 21 period EMA of the CBOE equity only put/call ratio.  The first observation is that the current levels are at the lower end of the channel going back to January of this year.  So it follows that we'll either head back up to the top of the channel, or we'll break out of the channel, starting a new intermediate trend.  While the latter would be very bullish, it seems like a long shot.  Odds have to go with the channel that's been in place for 9 months remaining in tact.  Below the chart is an indictator that works like the MACD, comparing a fast and slow moving average.  The PPO line has been holding below the signal line, but one could argue that after a month of sideways movement, we should soon get a pop in either direction.

September 22 update

SLV

Silver has definitely shown its hand, down 8% today.  Yesterday price traded back to cloud resistance and then dropped below the base line, which should have been where I got short.  Oh well, hind sight is always 20/20.  We still have a rising cloud on the daily, and a gap down today.  Given that 80% of gaps usually fill, a trade may yet manifest with some patience.  Putting this another way, the next leg of a larger degree correction, which now appears to have actually begun on 8/22 is confirmed.  The first wave of selling began back at the end of April, and pretty much happened all at once.   This correction will likely be larger, but unlike the first wave down, will have large counter-trend rallies along the way.   Now that we have confirmation of the intermediate term trend, we look for high probability opportunities to join it.

USO

Unlike silver, the intermediate trend in oil has been obvious.  It has been stair stepping down since April, never breaking cloud resistance.  We have a gap down this morning, and now both intermediate and short term pictures are bearish. 

Looking at the waves, we potentially have three waves down at subminuette degree.  Momentum is convergent on the 4H chart, which is consistent with a third.   Considering we're in a third of a third at minute degree, I'm expecting this selling to go much further.  That's at a high level, but if I see momentum divergence on the daily chart after a new price low, or the signal line cross back up over the base line, that'll be a signal to take profits and look for the next bounce to get short again.

US Equities
Looking at the waves for the US markets on the daily chart, we are definitely in a fifth wave down.  I have some uncertainty in my labeling regarding the sub waves.  The way I have it drawn below, this could be minute wave ((v)) of subminuette iii.  This would imply there is quite a bit further down to go before a decent bounce.   Or is this simply a fifth wave of subminuette degree?  There are huge implications to the degree of bounce that occurs when this selling is over.
If the ensuing bounce in the coming weeks is a 50% or 61.8% retracement of the entire bear market going back to say July 7th, accompanied by a return in bullish sentiment, then we will have a confirmed intermediate degree (1) down.  So from my perspective, it's too late to join the bear trend here.  It's better to wait for more clear patterns, and a better risk/reward opportunity.
 

 In hind sight, the waves have been pretty tough to read coming out of a triangle pattern, as we did.  I find it very interesting to go back and look at what Ichimoku charts were showing way back on July 29th.  The signal line crossed back down through the base line and price fell below a falling cloud on the daily chart with a confirmed sell signal.  We know what happened next.  That trade would have been good until at least 9/12.

September 19 update

USO

Crude is down three waves at subminuette degree, and that is likely where it will remain until tomorrow.  Momentum on the lower chart appears to confirm a third wave count, which subdivides into five waves with an extended fifth.  From an Elliott Wave perspective, If this selling is real, we will want to see another leg down.
Also, on the upper chart, we broke out of the triangle connecting subminuette degree waves b and d.  The real confirmation will be a break of the low of wave d.

Looking at the Ichimoku chart, the signal line is still over the base line on the daily chart (left), but price ran right into cloud resistance and bounced off hard in a confirmed bear trend.  Looking at the intra-day chart (right), the signal line crossed under the base line, prices have now fallen below the intra day cloud, and the lagging line is below price.    We have three bearish signals.  For confirmation, we'll want to see cloud resistance hold, and start falling.

SLV

As you can see from the chart below, I have plenty of confusion with regard to the proper count at both minute and minuette degree.  On the daily chart (upper), it's possible intermediate degree (B) completed back on 8/22.  Certainly momentum seems to favor the August 4th high being a minute wave ((iii)).  The problem is that we didn't get a clear five wave break out of the triangle after the proposed minute degree ((v)) on 8/22.  Rather, we got what could be interpreted as a minuette degree (a)-(b)-(c).   Or the proposed minuette degree (c) could actually be a subminuette degree i of iii down taking the form of a leading diagonal.  Leading diagonals are very rare, which is why I'm so hesitant to jump on this count.  Momentum is certainly not very convincing on the down side at either time frame.
Basically, from an Elliott perspective, I want to see the market show its hand here. It will either slow down and reverse back up, or the floor will drop out.  I will have missed the best entry, but at the same time, I'm tired of getting whipped around by silver.

Looking at Ichimoku, price on the daily chart (left) broke back over the cloud, but the cloud is starting to flatten, and the signal line crossed over the base line today.  On the 4H chart (right) we have a confirmed downtrend in progress.  We'll want to watch how price reacts which it trades back up to the cloud resistance.  It might be worthwhile to try short at that time.

A look at the Ichimoku indicator

In my down time this weekend, I've been looking at the Ichimoku cloud indicator.  I won't spend too much time on how it works, as there is an abundance of info on that elsewhere (have a look at stockcharts.com).  I decided it has the potential to be a wonderful adjunct to the wave principle. 

Where Ichimoku seems to shine is in its ability to properly identify when a change in trend has occurred.  Elliotticians are notorious for being "early", and I'm definitely no exception.  Any indicator which helps enforce a little patience and discipline is probably worth its weight in gold.  Of course, you will never be in ahead of a turn using a trend following approach, but perhaps if you avoid several false positives, that doesn't matter.  Or perhaps you take a partial position when the waves are calling for a potential turn, and you wait for confirmation before adding the remainder.  There are plenty of possibilities.

Elliott Wave labeling has been known to be somewhat subjective, but Ichimoku interpretation appears to be quite objective in its application.

It should be sufficient to answer the following questions:

1. Is the signal line (Tenkan) over the base line (Kijun)?  Yes = Bullish, No = Bearish
2. Is the cloud green and rising? Yes = Bullish  ** My chart  is yellow
3. Is the cloud red and falling? Yes = Bearish
4. Is price above, below, or in the cloud? Above = Bullish, Below = Bearish, In = Neutral
5. Is the lagging line (Chikou) above price? Yes = Bullish, No = Bearish

Obviously, some of these signals can be conflicting, so ideally you want them all to reinforce one another or you have to make a judgment call.

Let's take a look at USO with Ichimoku and Elliott Wave side-by-side.

On the right is my proposed Elliott Wave analysis, which I'll try and summarize.  The waves generally provide valuable perspective that you simply cannot get from any indicator.  Price was moving higher from the left side of the chart and dropped sharply.  Not shown is the higher degree formation, which I have as intermediate wave (B) or it could be a (2).  So we should be starting an intermediate degree (C) or (3).  We can't count five completed waves down of minor degree without breaking rules, so we still need minor degree waves 3, 4 and 5.  The same appears to be true at minute degree.  Momentum seems to confirm that minuette wave (iii) is a third wave.  We are completing minuette wave (iv) which appears to be a triangle, further reinforcing the minuette degree count, since triangles only happen in fourth waves.  We need a final wave down to complete minute wave ((iii)). 

Now lets look at the left chart for a fresh perspective.  Once again, prices on the left side of the chart were in a bullish trend.  The signal line (green) was above the base line (red).  Price was above the cloud, which was yellow and rising, and in fact was even above the base line.  Price dropped sharply starting May 3, leading to a bearish signal line crossover by May 6.  By May 11th, price had dropped below the cloud, which is another reinforcing bearish signal.   Additionally, around May 11th, the lagging line at the time was well  below price, which is another bearish signal.  Still, the cloud was yellow and rising at this point so perhaps some benefit of the doubt should go to the bulls.  By June 10th price had been grinding sideways to higher, but failing to significantly penetrate the bottom of the cloud, which was now acting as resistance.  Additionally, the leading cloud had now turned red and was falling.  From there you can see that the cloud has continued to act as resistance, and remained red and falling.
Several objective short opportunities presented themselves along the way: 

1. When price broke out of the cloud to the downside on May 11, generating 3 out of 4 bearish signals.  
2. When price bounced off the cloud resistance for the second time on June 9th
3. When price broke to new lows on June 16th after bouncing off the cloud resistance on June 9th
4. When price bounced off the cloud resistance again on July 26th
5. When a bearish signal cross happened again on August 4th
6. When price bounced off the cloud resistance again on September 15th (last Thursday)

I went short again last week based on intraday Elliott wave interpretation, but had I been following this trading methodology, I may have made the same decision.

Morning crude update part IV

This morning we broke down through the lower boundary of proposed triangle I was drawing  at micro degree earlier this morning.  That was the first warning sign.  Secondly, I started to see five wave moves down and three wave rallies.  What those things tell me is the new trend may be down.

We are still within the triangle boundaries at minuette degree.  Within that context, I started to relabel things.
Starting with a 4H chart, I redrew it with the assumption that the final wave e concluded at 9am on Wednesday.  If this is the case, the good news is that we haven't yet broken out of the triangle, so there's plenty of time to get short before the plunge.

Now we zoom in and look at a 30min chart.  What I see in the chart below is potentially a series of first and second waves.  In Elliott Wave analysis this usually points to a precursor to a dramatic move. 

I decided to go ahead and get short again.
Bearish VERTICAL: NOV11 USO 34-31 PUT

It's 3 points wide and slightly out of the money, with volatility relatively low, so it should provide some cushion should price consolidate a bit more next week or go against me.  At the same time, should price break out of the triangle profit should be better than a spread with one or two points wide.

Morning crude update part III

Yesterday my assumption was that micro wave ((B)) was completed, and that micro wave ((C)) was underway, and was unfolding into a diagonal.  What actually happened is that micro wave ((B)) turned out to be an expanded triangle (goes to a new price extreme).  Notice how the whole formation is angling against the trend.  Submicro wave (E) of the triangle is nearly complete, so we'll likely spend today carving out the final micro degree wave ((C)) to finally complete minuette wave (iv)  See prior post.

Morning crude update part II

Here's a detailed update from yesterday's post.

Micro degree waves ((A)) and ((B)) are now complete, and we have completed submicro waves (1) and likely (2) of ((C)).  Additionally, micro degree wave ((C)) appears to be an ending diagonal pattern, within minuette wave (iv) which is also an ending diagonal pattern.  Remember that in Elliott Wave Theory, ending diagonal patterns are always terminal moves for the one larger degree.  That means there's a very good chance that we start heading down for the next wave of at least minute degree.  Getting short ahead of the move will be crucial, since option premium will quickly inflate.

Upside targets from yesterday have not changed.

Morning crude update

We need one more A-B-C up at micro degree to complete submicro wave (5) of micro wave ((C)) of subminuette wave e of minuette wave (iv).  Micro wave ((C)) is an ending diagonal pattern, not surprisingly.

Ideally, I'd like to see it poke above submicro wave (3) at 90.53 on the /CL future, 35 on the USO, possibly touching the upper trendline around 91.50 or around 35.33 on the USO.

stopped out of USO post analysis

I sold my puts automatically when USO hit 34.80, my hard stop.
I'm struggling with whether to call this trade a success or a failure.
On the one hand, losses were kept very small.  As a trader, you know you are not always going to be right.
On the other hand, I certainly could have made less risky decisions and waited for better market confirmation at the expense of price and option premium.

I do think it's interesting that 35.14 is still untouched  at this time, which was my original stop, and the high of my proposed minuette wave (i).  We hit 35.09 during the trading day today.  Looking at the actual crude futures, however, that level has been breached.

So where does that leave the wave count?  Well, the only way we're getting higher highs is if subminuette degree wave e was not over.   So I'm going to back-track, and look at where I might have miscounted one of the waves.  The first thing that stands out is that my prior proposed final wave e had no subdivisions on the 4H chart, which I previously decided to ignore.  The rest of the waves prior to e look pretty cut and dry, so I'm going to assume those are correct for now.  In addition, I decided to look at the actual future, to see if any differences arise.

The first thing I noticed in the chart above, is that the prior labeling of minuette (i) down in my prior posts, which appeared to be a clear five waves down in the USO, is definitely an A-B-C on the future, where the C wave subdivides into a visible five waves.  Now we'll zoom in to the 30min chart of the last couple waves.

 Aha!  So it turns out that my proposed subminuette degree e wave, which should have been an A-B-C structure, actually was a five wave move!  The first subwave was a leading diagonal, and the fifth wave extended.  That whole move, therefore, was just micro degree ((A)).  Micro degree ((B)) was the expected three waves came down and almost touched the trendline and reversed.  That's another clue I missed before in my euphoria.  This last push higher, therefore, must be a ((C)) and therefore must subdivide into five waves.  That is what I'll be watching for tonight and tomorrow morning.  When ((C)) completes, we'll then likely have our final e.  Hopefully the trading gods will be kind and provide low risk short entry during the trading day.

USO morning update

Yesterday, what I thought was a subminuette degree a-b-c was really a micro degree ((1))-((2))-((3)).  This is one of the problems with Elliott Wave analysis, as those wave structures can look the exact same.  A safer approach is generally to wait for a trade below the supposed fourth wave for confirmation.  This requires patience, and willingness to miss the top.  As you can see, this is often better than picking the top and watching the market keep going.  In my case, however, my risk was defined, and I was already in from a higher level.  As such, oil traded higher than I expected, but my stop of 35.14 was not exceeded.  In addition, the subminuette degree a-b-c now appears to be complete.  It's easier to see on the /CL futures 15min chart.
I've moved my stop to the high of minuette degree (ii) on the USO at 34.87.

USO and Silver update

Quickly regarding my prior post on USO, my 61.8% target for today's bounce was hit, and I now have uncapped puts in the USO, with a stop at the recent high of 35.14. 

Regarding silver,  even today's bearish price action is not enough to get me short.  The wave structure is very unclear at the minuette and subminuette degrees, so I'm stepping aside.  I think it's very possible that the triangle for minor wave C did complete a couple weeks prior, and that we now have a completed minuette wave (i) down.  On the lower chart, I also have minuette wave (ii) up marked, but I'm not certain that it's over, since the price action following (ii), marked with a rectangle,  is not clear yet.

Therefore, I will wait to see what develops.  I think a surprise final upside advance could be in order, but I suspect that the minute wave ((v)) highs of 44.286 in the /SI silver futures are safe.

bear market bounce in Oil

Minuette wave (i) down is complete.  The subminuette (1H - lower chart, or 30min) waves are pretty much a mess.
There are three important pieces of evidence, however:

1. The wave count on the 4H chart(upper), is a clear five waves.
2. The overnight low on the subminuette chart shows a momentum divergence (ie lower price low, higher momentum low), consistent with a fifth wave.
3. The bounce this morning is appears to be a deep retracement, consistent with a second wave

I'll be looking at the 50% and 61.8% retracement levels of the prior five wave decline, or the likely termination for (ii) up, to use this bounce to buy back the short leg of my bear verticals.  I'll also want to see a completed A-B-C at subminuette degree.  The stop will remain at the high at 35.14.

USO downtrend resuming

Oil sold off hard overnight, and continues lower today.  By my count, it is somewhere in subminuette wave iii down.  For confirmation, we'll want to see a full five wave count, ideally taking out the prior subminuette wave d of minute wave ((iv)) at 32.44. 

Strategy:  As I posted previously, I'm short the USO since 9/7 via a vertical put spread.  Assuming the USO breaks out of the triangle as indicated above before minuette wave (i) down is complete, we should head up for an A-B-C retracement for minuette wave (ii).  I will at that time attempt to buy back the short leg of the put spread, essentially uncapping the position for maximum gain.

Short USO

Bearish VERTICAL: OCT11 USO 32/34 Put spread

I went short today when USO hit the 61.8% of subminuette wave c target for subminuette wave e, or 34.84. 

Initially I felt there were a couple problems with this trade.  First, there is no clear A-B-C structure visible on the 4H chart (upper), which is my preference for observing minuette degree moves.  Secondly, even on the 1H chart (lower), I do not see a 5-3-5 zigzag.   Nevertheless, price got to my target, so I entered the trade.

Next I decided to look at the actual future, /CL.  I find this fascinating, as here is a clear A-B-C up.  Micro wave ((A)) is a triangle, and ((C)) is a clear unmistakable five wave structure.  

Assuming crude turns down from here as I suspect, the moral of the story is sometimes you just get lucky.  My trade entry was not very responsible since I did not have an easily recognizable A-B-C structure at the time.  Perhaps the other takeaway is occasionally referencing the underlying future.  USO tracks crude very closely, but in this case, the future showed a much better picture.  This game is all about doing everything necessary to see the patterns that are there.

Silver still has a couple more weeks of sideways

I haven't posted on silver in a while.  

At minor degree, silver is still carving out a C wave, which is undeniably an ending diagonal pattern.  You can see the clear converging lines below on the top daily chart. 

Within minor wave C, minute wave ((v)) is still unfolding, and has apparently extended into an ending diagonal of its own.  What this tells me, is that this is a very important top.  Within minute wave ((v)), price appears to be completing subminuette wave (iv) down.  I have a tentative target of 40.129 for subminuette wave (iv)  of /SI, which is where (iv) is 61.8% of (ii) down.   Assuming price continues to my target, and does not rise above my projected wave (iii) termination, I don't think it'll reach the upper boundary of the minute degree diagonal.  Alternatively, if price exceeds 43.51 or subminuette wave (iii), then the third wave was prematurely marked complete.

USO new upside target

USO completed an A-B-C push down for subminuette wave d this morning at 7am just before the market opened.  The final wave e up of the contracting triangle should be underway.  I have 34.96-35.21 as my target area, which is where e will be 61.8% of c, and the upper boundary of the triangle connecting a and c respectively.
I'll be going preemptively short on a move above 34.96. I should note that my higher degree count has this whole triangle consolidation being minute wave ((iv)).  As such, it cannot overlap wave ((i)) at 35.16.  I can put my stop at 35.16.  This is a pretty tight range, if I can get into this trade, losses should be minimal if I'm wrong.

 9/6 9:10 PM
Update: moved short entry to 34:88

Major averages still likely in a fourth wave triangle

The correction that started Friday was very sharp and deep, but it has yet to take out the (b) wave low of my proposed triangle (see bottom 4H chart).  Plus, my wave momentum indicator has not really confirmed the down move.  As such, I still have (d) as my preferred count and will be looking for another push higher for (e).

If (b) is violated to the downside, the triangle is disqualified.  I do not have a good alternate count at this time, however.

S&P 500 completing (c) up part II

Subminuette wave (c) officially completed today at 9am by my measure.  We already have most or all of micro wave ((A)) of subminuette wave (d) down, meaning we get a retrace back up for ((B)) before going down for a deep retracement of subminuette wave (c).  We're in store for a good 50 point sell-off in the /ES from here, so definitely worth a trade.

As long as I get a decent trade higher, and remain below yesterday's highs, I'm looking for a short entry.  I'll probably play this via options on the IWM (Russell 2000 small cap ETF).